From the economy to the Fed and rising interest rates, four small-cap specialists reveal what surprises they think 2018 might have for investors.

Francis Gannon: The Economy Does Better than People Anticipate

Two things I think are going to surprise investors. One is the economy does much better than people anticipate. There seems to be a lot of naysayers in terms of the potential for the US economy, and actually the global economy. So I think the economy does better than people think. And the second thing, would be that the market does much better than people think people are waiting for a dramatic pullback in the market, that I don’t think is going to materialize, even though we are probably due for a least a 10 percent correction in the overall market, especially in the small-cap space, where we haven’t seen one going back to February of 2016, so we’re coming up on a two-year mark here, in terms of no significant correction in the Russell. But I think at the end of the year, the market is better than people think.

Jay Kaplan: Brand New Fed Is a Wild Card

I think the fact that we have a brand-new Fed could surprise everyone. We actually don’t know what the Fed will do. We don’t know if it’s business as usual. We don’t know if they’ll be a new approach. We don’t know how the Fed will react to a more strengthening and growing economy. So that could bring in all kinds of surprises. I think one of the surprises this year could be Obamacare. It hasn’t been talked about enough, but the repeal of the individual mandate inside the tax bill could throw a big monkey wrench into our healthcare system. That would be a big surprise.

Steven McBoyle: Underestimating How Quickly Inflation Will Rise

I think inflation could surprise to the upside. Again, as we know, risk assets generally don’t see multiple compression until inflation is in and around four percent. So inflation at this point in time looks manageable. But I do question whether we’re stressing the system. And why do I say that? Because as we sit here today, wage rate inflation is apparent. We have a material shortage of skilled labor. We are seeing commodity prices increase. And if you look at the actual underlying ISM operating rates, across the board, very, very strong. So we know that rates and inflation will increase as the economy improves. And that is a productive outcome, constructive particularly for Royce’s overall approach and strategies. But I do fear that we’re underestimating how quickly inflation will rise.

Buzz Zaino: Lower Liquidity Creates Headwinds for Stocks

Well, one of the things that I think can surprise investors in the new year is the absence of liquidity in the stock market. Over the last five or six years, we’ve had the circumstance where the Fed has been running a printing press and supplying a lot of cash to the to the market, and that money has been used to, among other things, push the price of the stocks up. We’re in a different circumstance now where the Fed is trimming its balance sheet and that availability of new monies is not there. As the economy is doing better and the earnings are going up, the prices of the stocks aren’t appreciating and we’ll be asking ourselves why? And the answer would be because the Fed simply isn’t supplying the monies to push the price of the stocks to the next level. In the big picture, though, for our own interests of course, you need less money to push the price of small stocks up than you do large stocks. So we might be in a better position.

Note: This article was contributed to ValueWalk.com by Francis Gannon, The Royce Funds.